For rated securitization exposures, is it appropriate to differentiate risk weights based on tranche thickness and pool granularity?
Apart from its dependence upon rating, tranche capital depends on underlying pools granularity, credit quality and asset correlations, as well as tranche thickness. Thus, the RBA is necessarily less accurate than the SFA. However, accuracy of the RBA can be improved if some of this dependence is taken into account. This is what was attempted in CP3 and ANPR via introduction of three separate capital factors for each rating. We believe that the regulators are on the right track here, but disagree on the calibration. We have computed capital according to Gordy/Jones model for underlying pools of different granularity and considered tranches of different ratings. We used Moodys table that relates ratings to expected losses4 and considered only infinitesimally thin tranches to remove the difference between the Moodys and S&P rating systems. Our calculations clearly show that granularity has much stronger effect on capital than RBA capital factors suggest, particularly for highly rated tran
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